Equities and the Economy:

It was “bad news is good news” on Friday with the closely watched Labor Department’s Employment Situation Report for July released. The bad news was that per the department 151,000 jobs were added in the month with economists forecasting an increase of 180,000. The good news was that investors interpreted the data that the Fed will wait to raise interest rates, and if you should know anything by now, a delay in raising interest rates is good for stocks. On the news the indexes rallied and finished with the Dow up 73 points, 0.39%, ending at 18,492, the S&P 500 added 9, 0.42%, 2,180 and the Nasdaq closed up 23, 0.43%, to 5,250. Stocks continue to climb the Wall of Worry with the market being in a very long bull market and S&P valuations frothy. But if you’re an international investor you’re putting your money in the U.S. economy/stock market because it is the best performing in the world. There’s a saying in trading and investing, “the trend is your friend” and that’s the way investors are playing it. It’s almost like they have one eye closed as they reluctantly hit the “buy” button for there is no other place to place money. Everyone is chasing yield and the negative interest rates in Europe and Japan are pushing money into the U.S. stock market. You might want to check your portfolio or call your CFA because professional money managers are feeling the pressure to beat the major indexes, and most haven’t, and are taking increasing risk to capture higher yields. Proof: the spread between Bloomberg’s Investment Grade and High Yield Indexes is at the highest level since mid-July 2015. And where are those high yields at? The volatile emerging market countries.

Back to interest rates, the market is pricing in a 24% chance the Fed will raise rates at their meeting this month and 46% in December.

I bet your forgot about high frequency trading. Well its alive and well. High frequency trading accounted for 49% of August’s daily trading volume of about 6.12 billion shares. For reference, during the peak levels of high frequency trading in 2009 about 61% of 9.8 billion of average daily shares traded were by high frequency trading.

Overnight the Asian markets all closed nicely higher and the European bourses are marginally higher as are Dow 17 points. Chatter.

Oil

Oil prices jumped on Friday recouping most of the price drop on Thursday adding $1.28, 3.0%, closing at $44.44 and Brent added $1.38, also 3.0%, settling at $46.83. On Friday Vladimir Putin called on oil producing countries to cap production levels at a meeting OPEC will be having later this month saying a cap would be “the right decision for world energy.” The conversation further developed over the weekend at the G-20 summit Russia and Saudi Arabia, the world’s two largest producers, signed an agreement to closely monitor the market and come up with recommendations to promote stability. However, the agreement allows Iran to continue ramping up production until it reaches pre-market levels. Additionally, Saudi Arabia’s oil minister stated a “freezing is one of the preferred possibilities, but it is not necessary today.” All I know is that if indeed OPEC and Russia do something to manage production and it drives the price higher U.S. producers will gladly fill in any gap. Always remember that it is the marginal producer that sets the price of a commodity and Saudi Arabia after many, many years has lost that role. It is now U.S. production that is the marginal barrel.

I remain very skeptical on OPEC’s ability to coordinate efficiently, not the least of my reasons is OPEC and Russia’s desperate need to fill their coffers. It’s also evident that a structural shift is occurring in U.S. production capacity due to the costs of drilling and completion down about 33% from their highs and remarkable innovation in shale oil and gas extraction. Remember, prior to last week the rig count was up 8 consecutive weeks. Speaking of the rig count, Baker Hughes released it Friday noting an increase of 8 rigs week on week. But drilling down the numbers were very interesting. While 14 rigs were added onshore, 7 rigs were taken out of commission offshore. Additionally, the net oil rig count increased by one while the gas rig count rose by seven.

I watched oil prices move over the weekend and on the Saudi/Russia news prices popped about 5% on Sunday but reality is setting in and the market has given all that up and WTI is down 33¢ from Friday’s close.

Courtesy of MDA information Systems LLC

Natural Gas

Natural gas did nothing on Friday, literally. It closed flat to Thursday at $2.792. Prices have dropped more than 20¢, 7%, over the past two weeks with folks realizing the autumn shoulder season is just about upon us. Additionally, natural gas production has crept higher and is back at levels not seen since early May. Although the Midwest and east are going to see some significantly higher temperatures this week (New York City will hit 90) the back end of the forecast (11-15 day period) has cooled somewhat and this is putting pressure on prices and with the October contract down 5.5¢.

LNG exports are continue to increase. According to Platts, LNG exports in August climbed to a record 22.9 Bcf. Nine cargos were loaded at Cheniere Energy’s Sabine Pass terminal last month. Six cargoes went to South America (Argentina, Brazil and Chile), one each to China and Jordan, and one still on the water.

Elsewhere

If you drove over the Labor Day weekend your gasoline bill was much lower than normal. Per the EIA, the average price for regular gasoline was the lowest in 12 years at $2.24/gallon and 27¢ lower than the same time last year thanks to lower crude prices. That being said, gasoline prices are 51¢ higher than their recent low of $1.72 hit in February when crude prices were around $26 per barrel. Prices may even go lower as we progress through the remainder of 2016 with refiners currently shifting production to less costly winter blend.